A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets
55 Pages Posted: 24 Sep 2020 Last revised: 17 Nov 2020
Date Written: November 17, 2020
We show that cryptocurrency markets are plagued by pump-and-dump manipulation, with at least 355 cases in seven months. Unlike stock market manipulators, cryptocurrency manipulators openly declare their intentions to pump specific coins, rather than trying to deceive investors. Puzzlingly, people join in despite negative expected returns. In a simple framework, we demonstrate how overconfidence and gambling preferences can explain participation in these schemes and find strong empirical support for both mechanisms. Pumps generate extreme price distortions of 65% on average, abnormal trading volumes in the millions of dollars, and large wealth transfers between participants. These manipulation schemes are likely to persist as long as regulators and exchanges turn a blind eye.
Keywords: market manipulation, pump-and-dump, cryptocurrencies, overconfidence, gambling
JEL Classification: G14, G41
Suggested Citation: Suggested Citation